Bank of Canada to cut rate by 50bp – Commerzbank

This afternoon UK time, the Bank of Canada (BoC) will announce its regular interest rate decision – and after the developments of the past few weeks, there is much to suggest that it will accelerate the pace of rate cuts, Commerzbank’s FX Analyst Michael Pfister notes.

Monetary policy remains too restrictive

“Just a few weeks ago, BoC Governor Tiff Macklem hinted that larger moves might be appropriate at upcoming meetings. Initially, the market was doubtful, but with inflation recently falling by a surprisingly large margin and now threatening to undershoot the target, sentiment has changed. The surprise has become part of a remarkable period of disinflation in which price pressures have nearly collapsed.”

“As a result, Canadian one-year inflation expectations are now only 1.2%, roughly in line with the average for the 2010s, when the policy rate was also significantly lower on average. Or to put it more succinctly: Despite the three rate cuts of 25 basis points so far, monetary policy remains too restrictive because inflation has collapsed at the same time.”

“Today’s larger cut should therefore no longer come as a surprise. What will be more interesting is how clearly further such large rate cuts will be announced. Given the inflation trend, we think it likely that the BoC will cut rates by another 50 basis points in December unless inflation miraculously picks up. If the BoC signals this more or less clearly today, the CAD is likely to come under pressure again.”